Euro weakens as Draghi says there was "wide discussion" on rates

The euro weakened for a second day against the dollar after European Central Bank President Mario Draghi said policy makers had a “wide discussion” on interest rates before they took a policy decision today.

The shared currency dropped from near a seven-month high against the yen after the ECB cut its growth forecasts and said it saw “downside risks” for the region. The yen strengthened versus most of its major counterparts as investors sought safer assets. New Zealand’s dollar rose to a two-month high against the greenback after the nation’s Reserve Bank said growth was likely to quicken.

“The fact the council discussed rate cuts, which is implicit in Draghi saying ‘We had a wide-ranging discussion but in the end we decided to leave rates unchanged,’ is undermining the euro,” said Gavin Friend, a currency strategist at National Australia Bank in London. “We don’t think the ECB is moving to a cut but the door is now open on these forecasts.”

The euro depreciated 0.3 percent to $1.3032 per dollar at 2:13 p.m. in London after falling 0.2 percent yesterday. The common currency dropped 0.5 percent to 107.29 yen after rising to 107.96 yesterday, the strongest level since April 20. The yen gained 0.2 percent to 82.33 per dollar.

Draghi said the ECB now forecasts that economy will shrink 0.5 percent this year, more than the 0.4 percent contraction it predicted in September. The ECB cut its 2013 forecast to a contraction of 0.3 percent from 0.5 percent growth, and projects expansion of 1 percent in 2014, he said.

‘Weak Activity’

“Weak activity is expected to extend into next year,” Draghi said at a press conference in Frankfurt after policy makers left the benchmark rate at a record low of 0.75 percent.

The ECB lowered its inflation forecast for next year to 1.6 percent from 1.9 percent.

“The ECB’s staff projections are predictably downbeat and there’s no joy for the euro from that,” said Peter Frank, global head of currency strategy at Banco Bilbao Vizcaya Argentaria SA in London. “There’s very little chance the euro area won’t be in recession next year.”

Gross domestic product in the euro area fell 0.1 percent in the third quarter from the previous three months, when it dropped 0.2 percent, the European Union’s statistics office said today, confirming an initial estimate published on Nov. 15.

The euro has weakened 2.1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen was the worst performer, falling 9.8 percent, and the dollar dropped 2.7 percent.

Kiwi Gains

The so-called kiwi advanced for a fourth day against the greenback after the Reserve Bank of New Zealand left its official cash rate unchanged at a record-low 2.5 percent, in line with the estimates of 16 economists in a Bloomberg survey.

“The overall outlook is for stronger domestic demand and the elimination of current excess capacity by the end of next year,” central bank Governor Graeme Wheeler said in Wellington. “This is expected to cause inflation to rise gradually toward the 2 percent target midpoint.”

New Zealand’s dollar rose 0.5 percent to 83.31 U.S. cents after advancing to 83.41, the strongest since Sept. 28.

“The statement from the RBNZ is less dovish than the market had anticipated, and that’s why we see a stronger New Zealand dollar,” said Yuki Sakasai, a foreign-exchange strategist in New York at Barclays Plc. “The market saw the slight possibility of a rate cut next year.”